ANNUAL REPORT

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• Sri Lanka: Sri Lanka is a model case study of China’s rising
influence in South Asia. While India and Sri Lanka share longstanding
historical and cultural ties, and India remains Sri
Lanka’s top trading partner, China’s exports to Sri Lanka are
rising fast. 11 Outside of Pakistan, Sri Lanka has been the leading
beneficiary of Chinese infrastructure investment in South
Asia, with nearly $15 billion worth of projects between 2009
and 2014. 12 In recent years, though, the relationship has been
marred by tensions. After a new government came to power in
Sri Lanka in January 2015, it demanded a review of several
Chinese projects, including the $1.4 billion Colombo Port City
real estate development (the project ultimately went ahead
after some terms were renegotiated).* The government raised
concerns about environmental impacts of Chinese projects, as
well as cozy ties between Chinese contractors and the previous
Sri Lankan government. 13 Hambantota, another major port
in Sri Lanka, has also been constructed primarily by Chinese
companies.† India’s worries about China’s growing presence in
Sri Lanka, which is located on a key trade route in the Indian
Ocean, prompted India’s Prime Minister Narendra Modi to visit
Colombo, signing agreements for new economic assistance, an
expanded free trade area, and a civil nuclear deal. 14
• Bangladesh: China overtook India as Bangladesh’s top source of
imports in 2004, 15 displacing many Indian goods, including cotton,
which is central to Bangladesh’s garment industry. 16 Bangladesh
has allocated two special economic zones for Chinese
investors in Chittagong, a major port, and Dhaka, the capital. 17
India has also been watching with unease China’s investment
in Bangladesh’s port infrastructure along the Bay of Bengal:
China helped upgrade Chittagong and had been pursuing a
port project at Sonadia Island. 18 In February 2016, however,
Bangladesh quietly closed the Sonadia project, opting instead
to develop another deep sea port, which India wants to help
build. 19 Bangladesh also permitted Indian cargo ships to access
Chittagong Port—a move Deepa M. Ollapally, professor at
George Washington University, characterized in her testimony
before the Commission as “a historic break from the past.” ‡ 20
* The Chinese projects in Sri Lanka that underwent a review were initiated during the administration
of President Mahinda Rajapaksa, who had a close relationship with the Chinese
government dating back to the last years of the Sri Lankan civil war, when China supplied Sri
Lanka with ammunition, jet fighters, and nonmilitary aid. After Maithripala Sirisena narrowly
defeated Mr. Rajapaksa to become Sri Lanka’s new president, he sharply criticized Mr. Rajapaksa’s
close ties with China (for example, Hambantota, which received the lion’s share of Chinese
projects, is Mr. Rajapaksa’s hometown and political base), and called for a review of Chinese
projects, alleging corruption and overpricing. Ranga Sirilal and Shihar Aneez, “Rajapaksa Comeback
Bid Checked by Sri Lanka Bribery Probe,” Reuters, July 24, 2015; Jeff M. Smith, “China’s
Investments in Sri Lanka: Why Beijing’s Bonds Come at a Price,” Foreign Affairs, May 23, 2016.
† Mr. Rajapaksa said India was offered to develop the Hambantota project first, but rejected
the offer. Sandeep Unnithan, “One-Upmanship in Sri Lanka: India and China Fight It out to
Rebuild the Island Nation’s Economy,” Daily Mail (UK), March 30, 2013; Ankit Panda, “China’s
Sri Lankan Port Ambitions Persist,” Diplomat (Japan), July 27, 2015.
‡ The agreement permitting Indian use of Chittagong and Mongla, another Bangladesh port,
was supposed to be signed in 2011, but fell through due to India’s failure to sign another bilateral
agreement (water-sharing accord for Teesta River). Although the water-sharing agreement
remains unsigned, the signing of the Indo-Bangladeshi Land Boundary Agreement in 2015, which
resolved a long-standing dispute, has reportedly improved the political climate enough to allow
the port deal to advance. Ranjana Narayan, “India, Bangladesh Business Set to Grow through
Ports, Waterways,” Economic Times (India), June 9, 2015.